At the U.S. Treasury Department’s Corporate Women in Finance Symposium, SEC Commissioner Kara Stein discussed “short-termism” and the composition of boards of directors.
Commissioner Stein identified “short-termism” as one obstacle to capital formation. She explained that “short-termism” occurs when companies are compelled by short-term pressures from certain investors and markets in general to look narrowly at the short term, becoming overly focused on meeting quarterly earnings, and therefore cut back on capital expenditures, research and development, and workforce training. Commissioner Stein commented that these cutbacks can reduce “innovation, higher productivity, and future growth.”
Commissioner Stein stated that “short-termism” can manifest itself in stock buybacks, where companies use their cash resources to buy shares back at record numbers, instead of investing in longer-term projects. While Commissioner Stein noted that buybacks have the “mechanical effect” of increasing a company’s Earnings per Share by reducing the number of outstanding shares, she cautioned that this comes at the expensive of companies “mortgaging their futures – and the futures of their employees and other stakeholders – just to meet short-term quarterly Earnings per Share targets.”
Commissioner Stein also discussed ways to strengthen public companies by increasing the diversity and changing the composition of boards of directors. She explained that diverse boards appear to help avoid “groupthink,” which she noted is a priority when corporate success depends heavily on risk management. Furthermore, Commissioner Stein raised the question of whether increased shareholder engagement could contribute to changing board composition. She advocated for a universal proxy ballot, which according to Commissioner Stein, could “provide better choice for all shareholders, and might even result in a more diverse board.”
Lofchie Comment: I am skeptical when the government suggests that companies would be more profitable if only they were more heavily regulated, or if the government could influence more decisions, such as who could or should serve on the company’s board – regardless of how well-intentioned the rules imposed by the government would be. If the academic studies cited as to diverse boards are in fact persuasive, then investors in the private sector are likely to be persuaded by them, and will not require any additional mandate from the government.
Likewise, it is appropriate to be skeptical as to whether the government can provide a model of long-term thinking to the private sector. Even if it could be demonstrated, one of the hallmarks of a free society is that such decision-making is best left in the hands of private individuals.
Rather than layering on still more rules in the aftermath of Dodd-Frank, which requires so many new rules that it remains years away from being fully implemented, it would be a better use of the government’s intellectual energy to consider whether it would be better for it to do less; i.e., whether any of its rules may discourage the goals of innovation, higher productivity and future growth.